Fears of global economic slowdown as virus corona follows trade war

With tens of millions of Chinese people quarantined inside their cities and thousands of factories closed, it is already clear that the coronavirus is about to sideswipe the global economy.

Last year’s tit-for-tat trade war between China and the US, which involved both sides slapping import tariffs on hundreds of billions of dollars’ worth of goods, knocked China’s already ailing GDP growth rate down to 6% in 2019 and helped depress global growth: it fell from 3.6% in 2018 to 3% last year.

A Chinese official warned last week that the spread of the virus from its beginnings in Wuhan to about 10,000 victims across the country would add to the damage from the trade war, and possibly cause more economic harm than the Sars epidemic, almost two decades ago. And with eight key regions and two cities in China subject to closure of non-essential business until at least 9 February, the significance of the epidemic is beyond doubt.

Zhang Ming, an economist at the Chinese Academy of Social Sciences (part of Beijing’s state council), predicted that China’s annual growth rate could drop below an annualised 5% in the January-March 2020 quarter. That would be a sharp slowdown compared with 6% annualised growth in the previous quarter.

Goldman Sachs believes the fast-spreading coronavirus will knock 0.4 percentage points from annualised growth in the US over the first quarter of 2020, as Chinese tourism to the US dips and exports of American goods to China take a hit. Its central forecast is for a partial rebound in US growth in the second quarter, but the risks are “skewed towards a larger hit”.

“A change in the news flow could lead to increased domestic risk-aversion behaviour or a sustained tightening in financial conditions. A larger outbreak of the virus in the US or the fear thereof could lead to a decline in domestic travel, commuting and shopping,” Goldman notes.

In 2002, Sars spread virtually unchecked to 37 countries, causing global panic, infecting more than 8,000 people and killing about 750. The coronavirus is spreading at a faster rate.

The Centre for Economics and Business Research (CEBR) says that because those who contract it are infectious before experiencing symptoms, the coronavirus could be much worse. Quarantine measures will largely be “a matter of shutting the stable door after the horse has bolted, unless they apply well beyond those who are currently infected,” it says.

The Chinese authorities were praised last week by the World Health Organization (WHO) after it declared the coronavirus to be a public health emergency of international concern. But both the communist-run government in Beijing and the WHO have faced severe criticism for reacting slowly given what is known about the rapid spread of the virus.

It is not easy to estimate the extent of the economic damage the virus is likely to inflict, but it is possible to use the Sars epidemic as a guide. Pantheon Macroeconomics estimates that Sars dragged China’s quarterly growth rate down to 1.8% in April-June 2003, from an average of 2.8%. The CEBR says the knock-on effect to world GDP was a fall in 2003 of between $30bn and $100bn, which was equal to between 0.08% and 0.25% of global GDP.

“Our worst-case calculation assumes that the coronavirus has a six times multiple effect on the Chinese economy. As the Chinese economy is nearly four times larger relative to the world economy [than in 2002], scaling up for this as well would create a world GDP negative impact of 1.8% to 6% based on the retrospective estimates of the impact of Sars,” the CEBR says.

“With world GDP set to grow by 2.9% this year before the coronavirus impact became apparent, it is clear that unless a cure and a vaccination are found rapidly, the fragile recovery that we predict is at risk.”

Britain and the rest of Europe have already had people return from China with confirmed or suspected cases of the virus, leading many airlines to suspend flights to China and in some cases Hong Kong, though not Macau so far. The US and Canada have also seen their first cases and warned citizens not to travel to China.

Source : theguardian